The indelible symbols of the housing bubble are the empty towers left in its wake. We have them here in Orange County, and the Chinese have them in every major city.
Irvine Home Address … 3131 MICHELSON Dr #507 Irvine, CA 92612
Resale Home Price …… $390,000
If you feel so empty
So used up so let down
If you feel so angry
So ripped off so stepped on
You're not the only one
Refusing to back down
You're not the only one
So get up
Let's start a riot, a riot
Let's start a riot
Let's start a riot, a riot
Let's start a riot
Three Days Grace — Let's Start a Riot
The Chinese have long known they have a problem with real estate values. Over the last several years, the Chinese government has enacted a series of half-hearted policies aimed to slow the increase in real estate prices. Unfortunately, the Chinese housing bubble is a runaway freight train heading for an awful crash.
Shanghai Homeowners Smash Showroom in Protest Over Falling Prices
October 25, 2011, 4:17 PM HKT
A weekend scuffle in Shanghai over a drop in apartment prices adds to increasing evidence that China’s efforts to tame a surging property market are having an impact – even as it offers a hint of what could happen if the measures go too far.
A group of around 400 homeowners in Shanghai demonstrated publicly and damaged a showroom operated by their property developer after the company said it cut prices. Home buyers had wanted to speak with the developer to refund or cancel their contracts but were unsuccessful, according to local media. One report said the price cuts exceeded 25% per square meter.
Can you imagine? These people are on the verge of rioting over a small decline in prices — at least it's small compared to what is coming.
I remember the fervor over rising house prices here and the hostility people exhibited at the mere suggestion that prices might go down. I had to blog anonymously for the first 18 months I wrote for this blog for fear of what the crazies might do. Given the behavior of these protestors in China ransacking a showroom, it appears my fears were well founded. When people realize they bought a steaming pile of crap rather than a pot of gold, they get pretty upset.
The local media reports said an unspecified number of people were injured. The property developer, a unit of China Overseas Holdings Ltd., didn’t respond to requests for comment. Photos of the event showed broken glass in the sales office, homeowners marching with banners and a phalanx of police watching over.
Chinese media separately reported that another group of Shanghai homeowners gathered on Saturday to speak with Longfor Properties Co., after it dropped asking prices to 14,000 yuan per square meter from 18,000 yuan per square meter at a residential development in the city’s Jiading district. Longfor didn’t return calls for comment. In an Oct. 20 release, it said it posted stellar sales following an aggressive sales strategy for three of its projects in Shanghai and in the city of Hangzhou.
It's time to line up the bagholders. Anyone who buys now in China will watch their investment turn to garbage overnight.
Beijing has been tightening control of the property market this year to tame surging property prices, amid fears that unaffordable housing could lead to greater social unrest. Measures include a massive 1.3 trillion yuan program to build about 10 million public housing units for low-income earners this year, as well as limits of purchases of second homes and other restrictions.
Data in recent weeks have suggested that the curbing efforts are having an impact. China’s housing prices were largely unchanged in September from a month earlier and grew at a slower pace than in September 2010, indicating Beijing’s efforts to cool the real estate sector are having an impact.
Speculation has turned to whether authorities will now relax restrictions. On Monday, China’s eastern city of Nanjing said it would let residents borrow more money from the city’s housing provident fund to buy “ordinary homes,” in a move designed to give the struggling property sector a boost. While it didn’t elaborate, such homes are often defined as no larger than 140 square meters.
In the southern city of Foshan earlier this month, local officials announced they would lift some property-market restrictions, then postponed that move the next day “to seek further public opinion and to make an assessment on the effects of such measures”, without giving further details.
Chinese Premier Wen Jiabao on Saturday stressed that all levels of government need to reinforce China’s controls of the property market, and that tightening efforts in the property market and the construction of public homes in China are at a pivotal moment.
It will be interesting to see how the Chinese react to this problem. They surrendered central control of all pricing and embraced a modified form of capitalism. With capitalism comes its associated ills, one of which is Ponzi viruses. Once a Ponzi virus in unleashed on the financial system it reproduces like a cancer cell until it grows so large it imperils the economy. China should have stamped out this virus years ago, but the ensuing development it created was highly sought after by the government, so they didn't recognize the danger in what they were doing.
They now have a Ponzi scheme so large it threatens everything. The civil unrest at this showroom is a minor skirmish in what could easily grow into a massive outpouring of violence when the crash wipes the illusions of wealth of the entire nation. If people are this upset over a 25% decline, they are obviously quite attached to their notion that prices only go up.
The Shanghai property-owner demonstration found little support on China’s Internet, where most still expressed worries that housing prices are too high. In an informal poll posted on the Twitter-like microblogging site Sina Weibo that had attracted more than 34,000 votes by Tuesday evening, 80% said they that thought it was normal for housing prices to fall and that the Shanghai protestors were just playing up the issue.
“This is an immoral action,” Weibo user Xiaobai Yeyou Naxieshi wrote in one of the 7 million property-related posts Sina had collected Tuesday on a special topic page. “Buying a house is a form of investment and every investment involves risk. If prices didn’t fall, people who can’t afford to buy an apartment would really have to wait forever.”
Interesting that your average Chinese citizen realizes people cannot be priced out forever, but the average Californian doesn't get the concept.
“Dear Government, can you please cancel my purchase of Petrochina shares? A refund based on the IPO price would be fine,” joked Linshi Renyuan. Petrochina, which debuted on the Shanghai stock market at 16.7 yuan per share in 2007, was trading at to 9.85 yuan per share at the end of the day Tuesday.
LOL! But real estate is different. Prices only go up. Real estate is an investment with no risk, right?
That said, a sustained drop in housing prices could spark its own displeasure. It could also spark criticism that Beijing’s policies don’t address long-term issues.
Outspoken Chinese real estate tycoon Ren Zhiqiang, whose properties haven’t been involved in the demonstrations, said on his microblogon Monday, “Does the government really want to solve the housing (issue) for the public or is it just using the property market as a tool to balance between economic growth and the public sentiment?”
The answer is obvious: the Chinese government doesn't care at all about providing affordable housing, it simply wants economic growth and the perception of wealth even if that wealth is an illusion based on a Ponzi scheme.
“Why doesn’t the government work on land supply, land prices and tax incentives? Why doesn’t it raise wages and lower home purchase taxes, and raise the affordability for the citizens?” Mr. Ren asked.
–– Esther Fung with contributions from Amy Li and Josh Chin
Yes, why doesn't the Chinese government work on those things. They demand they have created is artificial, just like ours was. They need to create real demand based on higher wages and increased worker productivity. The rest is an illusion.
North Korea towers in Irvine
Shanghai will be littered with empty housing towers built for high-end residents who simply don't exist. Orange County is also littered with empty housing towers built for high wage earners who simply aren't present. One of the most obvious examples of this phenomenon is the North Korea towers in Irvine, otherwise known as the Marquee at Park Place.
Most building and development happens in reaction to prices in the resale market. If developers believe they can sell a certain product for a certain price, they will provide that product if they believe they can do it profitably. Unfortunately, when the resale value is an illusion created by a housing bubble, developers build projects like these and either sell them to bagholders like the North Korea towers, or they become the bagholders like the Astoria across the street.
These false price signals sets in motion a great deal of wasted economic activity. The resources devoted to producing the worthless assets could have been, and should have been, diverted to other uses which would have had more societal value. This misallocation of resources is the problem with Ponzi viruses. For example, in the 16th century, the entire Dutch economy revolved around producing tulip bulbs. The misallocation of resources created a severe economic slump when tulip prices crashed.
Each dollar spent constructing an empty housing tower was robbed from a better use. Whatever this use might have been, it certainly would have helped the economy far more than the empty towers which serve as a testament to the folly of housing bubbles everywhere.
——————————————————————————————————————————————-
This property is available for sale via the MLS.
Please contact Shevy Akason, #01836707
949.769.1599
sales@idealhomebrokers.com
Irvine House Address … 3131 MICHELSON Dr #507 Irvine, CA 92612
Resale House Price …… $390,000
Beds: 2
Baths: 2
Sq. Ft.: 1500
$260/SF
Property Type: Residential, Condominium
Style: One Level, Contemporary
View: Yes
Year Built: 2005
Community: Airport Area
County: Orange
MLS#: S677328
Source: SoCalMLS
On Redfin: 6 days
——————————————————————————
The unit is on the 5th floor of the Marquee at park Place. This unit is a 2 bedroom plus den with 2 baths. View of surrounding office buildings. Two parking spots in the second level. Small storage locker.
——————————————————————————————————————————————-
Proprietary IHB commentary and analysis 
Resale Home Price …… $390,000
House Purchase Price … $817,500
House Purchase Date …. 1/20/2006
Net Gain (Loss) ………. ($450,900)
Percent Change ………. -55.2%
Annual Appreciation … -12.1%
Cost of Home Ownership
————————————————-
$390,000 ………. Asking Price
$13,650 ………. 3.5% Down FHA Financing
4.18% …………… Mortgage Interest Rate
$376,350 ………. 30-Year Mortgage
$136,919 ………. Income Requirement
$1,836 ………. Monthly Mortgage Payment
$338 ………. Property Tax (@1.04%)
$0 ………. Special Taxes and Levies (Mello Roos)
$81 ………. Homeowners Insurance (@ 0.25%)
$433 ………. Private Mortgage Insurance
$849 ………. Homeowners Association Fees
============================================
$3,537 ………. Monthly Cash Outlays
-$289 ………. Tax Savings (% of Interest and Property Tax)
-$525 ………. Equity Hidden in Payment (Amortization)
$20 ………. Lost Income to Down Payment (net of taxes)
$69 ………. Maintenance and Replacement Reserves
============================================
$2,813 ………. Monthly Cost of Ownership
Cash Acquisition Demands
——————————————————————————
$3,900 ………. Furnishing and Move In @1%
$3,900 ………. Closing Costs @1%
$3,764 ………… Interest Points @1% of Loan
$13,650 ………. Down Payment
============================================
$25,214 ………. Total Cash Costs
$43,100 ………… Emergency Cash Reserves
============================================
$68,314 ………. Total Savings Needed
——————————————————————————————————————————————————-
November's presentatations have been moved
Due to competing demands from holiday parties, we have decided to move the November and December presentations to the classroom at the offices of Intercap Lending.
Larry Roberts is hosting a Las Vegas cashflow properties presentation at the offices of Intercap Lending (9401 Jeronimo, Suite 200, Irvine, CA 92618) on November 9, 2011. Please RSVP at sales@idealhomebrokers.com. Register online here: Las Vegas cashflow property – Intercap Lending
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Larry Roberts and Shevy Akason are hosting an OC housing market presentation at the offices of Intercap Lending (9401 Jeronimo, Suite 200, Irvine, CA 92618) on November 9, 2011. Please RSVP at sales@idealhomebrokers.com. Register online here: OC Housing Market – Intercap Lending
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More leaks regarding the state AGs’ settlement:
“…As things stand, the settlement, said to total about $25 billion, would cost banks very little in actual cash — $3.5 billion to $5 billion. A dozen or so financial companies would contribute that money. The rest — an estimated $20 billion — would consist of credits to banks that agree to reduce a predetermined dollar amount of principal owed on mortgages that they own or service for private investors. How many credits would accrue to a bank is unclear, but the amount would be based on a formula agreed to by the negotiators. A bank that writes down a second lien, for example, would receive a different amount from one that writes down a first lien…” http://www.nytimes.com/2011/10/30/business/a-foreclosure-settlement-that-wouldnt-sting.html?_r=2&ref=your-money&pagewanted=print
Thanks, I will use that in a post next week. At first glance, this settlement is a joke. The banks are going to get credit for losses they would have incurred anyway. It may benefit a few loan owners if they reduce principal and let the loan owners stay in their homes, but it isn’t clear whether or not the principal reductions will be part of short sales or unprompted reductions to keep people in properties they can’t afford.
I am eagerly awaiting the details. I don’t need a principal reduction, but I think a rate reduction (to current market rates) would greatly discourage strategic default by borrowers in similar situations to mine.
I think the rate reduction will serve to reduce strategic default at the margins.
It will be interesting to see if they allow it for non-owner occupants. Many landlords who currently have negative cashflow might come closer to breakeven if their rates are lowered.
I didn’t you could own real estate in China? They are still communist, right?
Sorry for the omission……
I didn’t know you could own real estate in China? They are still communist, right?
Yes, they are communist, but they do allow private property ownership. It’s been part of their tentative embrace of capitalism. These Ponzi viruses may cause them to rethink some of their policies.
Just some Guy: Mao Tse Tung would turn in his grave.
I guess the only “Communists” in China are inside the Government. They only have one Party..the “Communist Party”. I was shocked to learn they live in the best Parts of Beijing in, wait for it..MANSIONS!!
Good luck to the Protesters…China doesn’t have freedom of speech or freedom of the press. It doesn’t tolerate dissent. Authorities can arrest and imprison people who threaten stability, as the party defines it. Any group that dares to protest, even against Property Values declining, will be treated brutally. There are no civil liberties, no labor unions, no centers of political power outside the communist party.
I expect the Corporations and Banks will be running the Country in the same way they do in the US before too long..what’s that? They already do? See, I told you!!
The Communist Party won’t last too long it’s only a matter of time because when those in power have to use violence against Citizens who protest, they will sooner or later fall.
It normally goes like this: First they ignore you, then they laugh at you, then they fight you..then you win.
A view of surrounding office buildings, and a small storage locker! Well hot-damn, all of my lifelong dreams in one place, I gotta get me a piece of that! Where do I sign up?
I note that the association fees are still at their reduced level. I wonder how they are paying for maintenance and repairs, and building up a contingency account for long-term requirements?
My guess is that they aren’t funding anything properly. I suspect there will be big assessments in the future for all the new homeowners.
Alan – you took the words right out of mouth. “View of surrounding office buildings” indeed! That is what I have always wanted – to live in a condo with a view of surrounding office buildings. Think about it…office buildings are so scenic and romantic. Unlike, say, the ocean or the setting sun they never change. They’re always there. Steel and glass, glass and steel…maybe the signage might change, but the buildings will always be there!
When the nearby Astoria was made into a leasing building instead of ownership building, the 6 people who owned apartments in Astoria were bought out. I know one of them. He got bought out at a higher $ value than he bought in.
Talk about getting bailed out, that guy should buy some lottery tickets.
I told him he was going to lose his ass when he bought that apartment in 2009…but I was wrong.
I wasn’t aware they reduced HoAs. Is there a link to that somewhere?
I was in Shanghai in 2008 and there were already many empty high rise condo buildings. But they were not empty because they hadn’t sold. Rather the buyers were mostly pure speculation buyers and they believed if the units were occupied then it would reduce their resale value. Craziest thing I ever witnessed. About the same time I visited Vancouver BC and also saw many empty condo buildings. Similar situation. All of the units were sold but the owners for the most part lived in China and used them as vacation spots. But they were not renting them out presumably because of resale concerns. Construction of new condo buildings were briskly continuing in neighborhoods surrounded with dozens of dark towers.
I was sure that these two markets were headed for a collapse, but at least in Vancouver have seen little sign of it happening. Different cultures have different bubble psychologies I guess.
You can’t sustain a real estate market trading empty boxes. We tried that for a while, and it didn’t work out. If these buyers are holding these units empty, they will eventually resort to plan B and rent them. When that happens, the bottom will drop out of the rental market which will in turn lower rental parity and put more pressure on resale pricing. The double whammy will push prices much, much lower for a very long time.
Look out below….
Good Post, IR.
I lived in China for three years and things are getting crazier than ever. It is worse than California ever was due to the lack of an open economy and a limited number of good investment opportunities. One of the great ‘benefits’ of communism is that the whole society has lost it’s sense of supply and demand. In middle-class areas of Shanghai, condos are stll trading for $500,000 and up, despite the fact that the prevailing wage in those parts is around US$10,000 per year. People don’t bother to rent them out because they are investing ‘for the capital gains’. Sound familiar?
In the smaller cities it is even worse.
Chinese (and Russian) real estate purchases in London, Australia and Vancouver are examples of capital flight.
Wealthy people know that they are only one informant or Cultural Revolution away from losing it all.
So they mainly care about parking capital somewhere else, and generating rental income is low on their list of priorities.
The wealth disparity in China is also so great that some rich people who have “made it” dream of emigrating to countries where they can have a lower profile. Or for now at least keeping their options open. 🙂
I think you’re referring to the very, very wealthy few Chinese who can actually move enough of their capital offshore to effect a purchase in a foreign land.
If many of them are “paper tigers” much like all the wanna-be RE tycoons here during our massive run-up then they’ve not got any real cash at all. No cash means no buying assets in foreign markets.
Guess that means that all those mysterious FCB’s (foreign cash buyers) who are supposedly going to save OC property values are now actually F***ked Chinese Busted.
As IR suggests …. LOOK OUT BELOW!!!